Friday, February 10, 2012

Bonds Buffetted

Warren Buffett on Thursday said that bonds and other assets tied to currencies -- which are basically anything that pays dividends that vary with general interest rates -- "are among the most dangerous of assets."

I couldn't agree more. In fact, I think Mr. B is a bit late to his conclusion.

On Dec. 11, 2010, I wrote in my essay The Myth of the Income Play, "[A]ny dividend can be wiped out completely by a month's worth of capital losses."

To summarize my argument briefly, dividend plays -- both long-term bonds and stocks -- tend to fluctuate every bit as much as non-dividend-paying stocks. However, to benefit from the dividend, the trader must hold the instrument through the ex-dividend date.

The presence of a dividend tends to encourage buy-and-hold trading so as to capture the payout, even when the chart screams "Get out now!"

If there is an active options market in the dividend-paying instrument, then it is possible to hedge the capital loss while holding for the dividend.

Absent a hedging method, income plays are a good way to lose money.

Buffett is based in Nebraska and is widely known as the "Oracle of Omaha".

I am based in Oregon. Now that Mr. B and I are on the same page, I hope that I can be known as the "Prophet of Portland".

No comments:

Post a Comment